CHAPTER 4
-
INTERNATIONAL ASPECTS OF INCOME TAX
History
Chapter 4 inserted by No 162 of 2001.
PART 4-5
-
GENERAL
History
Part 4-5 inserted by No 162 of 2001.
Division 820
-
Thin capitalisation rules
History
Division 820 inserted by No 162 of 2001.
Subdivision 820-C
-
Thin capitalisation rules for inward investing financial entities (non-ADI)
History
Subdiv 820-C heading amended by No 23 of 2024, s 3 and Sch 2 item 54, by inserting
"
financial
"
, effective 1 July 2024. For application provisions, see note under s
705-60
.
Subdiv 820-C inserted by No 162 of 2001.
Operative provisions
SECTION 820-185
Thin capitalisation rule for inward investing financial entities (non-ADI)
Thin capitalisation rule
820-185(1A)
Subsection
(1)
applies if:
(a)
an entity is an
*
inward investing financial entity (non-ADI) (see subsection
(2)
) for all of an income year, but is not also an
*
outward investing financial entity (non-ADI) (see section
820-85
) for all or any part of that year; and
(b)
either:
(i)
the entity has made a choice under subsection
(2C)
in relation to the income year; or
(ii)
otherwise
-
the entity
'
s
*
adjusted average debt (see subsection
(3)
) for the income year exceeds its
*
maximum allowable debt (see section
820-190
) for the income year.
Note:
This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are
$
2 million or less, see section
820-35
.
History
S 820-185(1A) inserted by No 23 of 2024, s 3 and Sch 2 item 57, effective 1 July 2024. For application provisions, see note under s
705-60
.
820-185(1)
This subsection disallows:
(a)
if paragraph
(1A)(b)(i)
applies
-
all or part of the entity
'
s
*
debt deductions for the income year; or
(b)
if paragraph
(1A)(b)(ii)
applies
-
all or a part of each debt deduction of the entity for the income year.
Note 1:
To work out the amount to be disallowed, see section
820-220
.
Note 2:
For the rules that apply to an entity that is an outward investing financial entity (non-ADI) as well as an inward investing financial entity (non-ADI), see Subdivision
820-B
.
Note 3:
For the rules that apply to an entity that is an inward investing financial entity (non-ADI) for only a part of an income year, see section
820-225
in conjunction with subsection
(2)
of this section.
Note 4:
To calculate an average value for the purposes of this Division, see Subdivision
820-G
.
Note 5:
A consolidated group or MEC group may be an inward investing financial entity (non-ADI) to which this Subdivision applies: see Subdivisions
820-FA
and
820-FB
.
History
S 820-185(1) substituted by No 23 of 2024, s 3 and Sch 2 item 57, effective 1 July 2024. For application provisions, see note under s
705-60
. S 820-185(1) formerly read:
820-185(1)
This subsection disallows all or a part of each *debt deduction of an entity for an income year if:
(a)
the entity is an *inward investing entity (non-ADI) for that year (see subsection (2)), but is not also an *outward investing entity (non-ADI) (see section 820-85) for all or any part of that year; and
(b)
for that year, the entity
'
s *adjusted average debt (see subsection (3)) exceeds its *maximum allowable debt (see section 820-190).
Note 1:
This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are $2 million or less, see section 820-35.
Note 2:
To work out the amount to be disallowed, see section 820-220.
Note 3:
For the rules that apply to an entity that is an outward investing entity (non-ADI) as well as an inward investing entity (non-ADI), see Subdivision 820-B.
Note 4:
For the rules that apply to an entity that is an inward investing entity (non-ADI) for only a part of an income year, see section 820-225 in conjunction with subsection (2) of this section.
Note 5:
To calculate an average value for the purposes of this Division, see Subdivision 820-G.
Note 6:
A consolidated group or MEC group may be an inward investing entity (non-ADI) to which this Subdivision applies: see Subdivisions 820-FA and 820-FB.
S 820-185(1) amended by No 110 of 2014, s 3 and Sch 1 item 34, by substituting
"
$2 million
"
for
"
$250,000
"
in note 1, applicable to assessments for income years starting on or after 1 July 2014.
S 820-185(1) amended by
No 101 of 2006
, s 3 and Sch 2 item 752, by substituting note 6, effective 14 September 2006. For application and savings provisions see the
CCH Australian Income Tax Legislation archive
. Note 6 formerly read:
Note 6:
A resident TC group may be an inward investing entity (non-ADI) to which this Subdivision applies, see Subdivision
820-F
.
Inward investing financial entity (non-ADI)
820-185(2)
The entity is an
inward investing financial entity (non-ADI)
for a period that is all or a part of an income year if, and only if, it is:
(b)
an
*
inward investment vehicle (financial) for that period (as set out in item 1 of the following table); or
(d)
an
*
inward investor (financial) for that period (as set out in item 2 of that table).
|
Inward investing financial entity (non-ADI)
|
|
Item
|
If the entity is a:
|
and the entity:
|
the entity is an:
|
| 1 |
*foreign controlled Australian entity throughout a period that is all or a part of an income year |
is a *financial entity throughout that period |
inward investment vehicle (financial)
for that period |
| 2 |
*foreign entity throughout a period that is all or a part of an income year |
is a financial entity throughout that period |
inward investor (financial)
for that period |
Note 1:
To determine whether an entity is a foreign controlled Australian entity, see Subdivision
820-H
.
Note 2:
An entity covered by item 2 of the table may be required to keep certain records, see Subdivision
820-L
.
History
S 820-185(2) substituted by No 23 of 2024, s 3 and Sch 2 item 57, effective 1 July 2024. For application provisions, see note under s
705-60
. S 820-185(2) formerly read:
Inward investing entity (non-ADI)
820-185(2)
The entity is an
inward investing entity (non-ADI)
for a period that is all or a part of an income year if, and only if, it is:
(a)
an *inward investment vehicle (general) for that period (as set out in item 1 of the following table); or
(b)
an *inward investment vehicle (financial) for that period (as set out in item 2 of that table); or
(c)
an *inward investor (general) for that period (as set out in item 3 of that table); or
(d)
an *inward investor (financial) for that period (as set out in item 4 of that table).
|
Inward investing entity (non-ADI)
|
|
Item
|
If the entity is a:
|
and the entity:
|
the entity is an:
|
| 1 |
*foreign controlled Australian entity throughout a period that is all or a part of an income year |
is not a *financial entity, nor an *ADI, at any time during that period |
inward investment vehicle (general)
for that period |
| 2 |
*foreign controlled Australian entity throughout a period that is all or a part of an income year |
is a *financial entity throughout that period |
inward investment vehicle (financial)
for that period |
| 3 |
*foreign entity throughout a period that is all or a part of an income year |
is not a *financial entity, nor an *ADI, at any time during that period |
inward investor (general)
for that period |
| 4 |
*foreign entity throughout a period that is all or a part of an income year |
is a *financial entity throughout that period |
inward investor (financial)
for that period |
Note 1:
To determine whether an entity is a foreign controlled Australian entity, see Subdivision 820-H.
Note 2:
The rules that apply to these 4 types of entities are different in some instances. For example, see sections 820-195 to 820-210.
Note 3:
An entity covered by item 3 or 4 of the table may be required to keep certain records, see Subdivision 820-L.
820-185(2A)
However, the entity is
not
an
inward investing financial entity (non-ADI)
for a period that is all or a part of an income year if it is a
*
general class investor for that year.
History
S 820-185(2A) inserted by No 23 of 2024, s 3 and Sch 2 item 57, effective 1 July 2024. For application provisions, see note under s
705-60
.
820-185(2B)
Subsection
(2A)
does not apply for the purposes of subsection
820-46(2)
(definition of
general class investor
).
History
S 820-185(2B) inserted by No 23 of 2024, s 3 and Sch 2 item 57, effective 1 July 2024. For application provisions, see note under s
705-60
.
820-185(2C)
An entity that is an
*
inward investing financial entity (non-ADI) for a period that is all or part of an income year may make a choice under this subsection to apply the third party debt test in relation to that income year.
History
S 820-185(2C) inserted by No 23 of 2024, s 3 and Sch 2 item 57, effective 1 July 2024. For application provisions, see note under s
705-60
.
820-185(2D)
Section
820-47
applies in relation to a choice under subsection
(2C)
in the same way that it applies in relation to a choice under subsection
820-46(3)
or
(4)
.
History
S 820-185(2D) inserted by No 23 of 2024, s 3 and Sch 2 item 57, effective 1 July 2024. For application provisions, see note under s
705-60
.
Adjusted average debt
820-185(3)
The entity
'
s
adjusted average debt
for an income year is the result of applying the method statement in this subsection.
Method statement
Step 1.
Work out the average value, for that year (the
relevant year
), of all the *debt capital of the entity that gives rise to *debt deductions of the entity for that or any other income year.
Step 2.
Reduce the result of step 1 by the average value, for the relevant year, of:
(a) if the entity is an *inward investment vehicle (financial) for that year
-
all the *associate entity debt of the entity; or
(b) if the entity is an *inward investor (financial) for that year
-
all the associate entity debt of the entity, to the extent that it is attributable to the entity
'
s *Australian permanent establishments.
Step 3.
If the entity is a *financial entity throughout the relevant year, add to the result of step 2 the average value, for the relevant year, of the entity
'
s *borrowed securities amount.
Step 4.
Add to the result of step 3 the average value, for the relevant year, of the *cost-free debt capital of the entity. The result of this step is the
adjusted average debt
.
Note:
To calculate an average value for the purposes of this Division, see Subdivision
820-G
.
History
S 820-185(3) amended by No 23 of 2024, s 3 and Sch 2 items 58 and 59, by omitting
"
an *inward investment vehicle (general) or
"
before
"
an *inward investment
"
from para (a) of method statement, step 2 and
"
an *inward investor (general) or
"
before
"
an *inward investor
"
from para (b) of method statement, step 2, effective 1 July 2024. For application provisions, see note under s
705-60
.
S 820-185(3) amended by No 142 of 2003 and No 53 of 2002.
820-185(4)
The entity
'
s *adjusted average debt does not exceed its *maximum allowable debt if the adjusted average debt is nil or a negative amount.
History
S 820-185 inserted by No 162 of 2001.
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